August 2014 Issue 96

Genuine employer exemption: payroll tax changes

B2B Editor1 August 2014

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On 5 June 2014 the ACT Government introduced the Payroll Tax Amendment Bill 2014 that will remove the “genuine employer” payroll tax exemption on wages paid to subcontractors by employment agents and payroll agencies (collectively “”agencies”). The bill was originally slated to commence on 1 July 2014, however the Commissioner for ACT Revenue acknowledged this date would have been challenging for the industry and the commencement date has been delayed until 1 October 2014.

The genuine employer exemption is currently relied on by a majority of local employment agencies, payroll companies and subcontractors (ICT contractors in particular). Its removal effectively imposes a new tax on an industry locally evolved to meet the Commonwealth’s ad hoc labour needs. Someone in the employment agent/subcontractor chain will end up wearing that 6.85% cost.

That 6.85% cost may well represent a considerable part of an agency’s revenue, threatening its very viability. Without provisions to increase the contracted “spend”, this cost will represent a significant loss of income for a subcontractor or risk the agency’s business. Who will bear that cost will depend upon the contractual arrangements in place.

Contracts that have not yet been executed should address the payroll tax cost from 1 October 2014; if agencies are to avoid this imposition, they need the indemnities to be clear. Where contracts had already been negotiated and executed, the question of who will bear the payroll tax cost will turn on the specific terms of those contracts.

Well drafted contracts should have anticipated the possible removal of the exemption and should clearly set out how any increase in tax liability will be assigned. Poorly drafted contracts may be unclear and those uncertainties may result in parties attempting to pass on costs that they are not entitled to pass on, parties refusing liability for costs that they are liable to bear, breaches or terminations of contracts that are no longer profitable and possible insolvencies within the industry.

This issue is further complicated by the $1.85m tax free threshold for payroll tax. Employment agencies do not have to pay the tax on their first $1.85m of payroll in the ACT. If agencies simply withhold a flat 6.85% from all contractors’ wages in order to meet the payroll tax obligations, what happens to that first $126,725.00 they withhold but do not have to pay in tax? Some agencies may pocket the money; others may hold the money on trust for the subcontractors and return it at the end of the financial year on a pro-rata basis.

If you are involved in the industry then it is imperative that you review your contracts to ensure your position is protected.

Mark Love, Legal Director, Business Law 9th Floor, Canberra House, 40 Marcus Clarke Street, Canberra ACT 2601 E: [email protected] T: 02 6274 0810 |